Loss of Mortgage Deduction Stirs Homeowners and Mortgage Industry

Embedded in President Barack Obama's budget is an attack on something as American as baseball and apple pie--the mortgage-interest deduction. "Buy a home and get a tax break" is practically a national anthem in the US.

Although the proposal only affects households earning over $250,000, more specifically those in the 33 to 35 percent tax bracket, there is concern this will be a slippery slope. The Obama administration is struggling to find revenue sources to off-set massive spending and as a result are dragging in a lot of sacred cows for slaughter.

Mortgage and real estate industry groups are protesting that this will affect more than a few rich peoples bank accounts. They argue it will undermine any hope for near-term housing market recovery.

In a recent statement to the Mercury News, Lawrence Yun, chief economist for the National Association of Realtors made the case that "even though the intended impact is on the top 2 percent of household, the intended consequence will be a reduction in home values for homeowners across the country."

The thinking is that without the mortgage-interest deduction affluent buyers will spend less on homes and drive already depressed home values even lower.

The concept of revising the mortgage deduction is alarming, but not new. As recent as 2005, President Bush attempted to alter the tax code to convert the mortgage-interest deduction to a 15 percent tax credit. This proposal was dead on arrival when it hit Congress. Most think this proposal will die a similar death, but with a bit more debate.

As such mortgage and real estate industry groups, like the National Association of Realtors, Mortgage Bankers Association, and the National Association of Home Builders areorganizing their fight to kill this latest initiative against homeowners.

The other groups potentially on the warpath against this initiative are homeowners in California and New York, whom some researchers say IRS data reflects aredisproportionately impacted by the elimination of this deduction. More than 500,000 high-income tax filers in California and another 250,000 in New York are expected to be impacted by this new tax rule that would be implemented in 2011, if passed.